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How to Calculate your Debt to Income (DTI) Ratio & Qualify for a Home Loan


Debt to Income is like your debt in a boxing ring with your income, comparing the two of them and whatever shakes out at the end is known your Debt to Income ratio.


While it may seem complicated to calculate, its actually not as bad as you may think.

 

Monthly Gross Income


The first number you need to figure out is your monthly gross income. Now, when considering your income on a loan application, remember you need to prove this income. For example, you have a regular 9-5 job that would then be considered your “main” source of income, you will more than likely need to provide check stubs, your W2 taxes returns, etc.


If you also cut grass every once in a while as a side job, on top of your 9-5 and want to include that as income as well, that’s fine, just be prepared that you may need to show all of the documents to the lender proving this income. If you don’t have all these documents available, its best to just include the income you have documents for.


If you receive child support or alimony, you may consider this as an additional source of income so long as you have court order mandating the payments and they have actually been paid to you within the last 6 months. If the child is reaching the age limit of 18 that your receiving child support for, you lender wont usually allow you to consider this income as it will be scheduled to stop soon.


Now, with all of that being said, lets say you have one main source of income coming from your 9-5 job, and that pays you $18 an hour at 40 hours a week.


You would multiply 18 x 40 = $720 week. There are 52 weeks in a year, so $720 x 52 = $37,440 per year is your gross (before taxes) annual income. Now, divide that annual gross income by 12 (37,440 / 12 = 3,120). $3,120 is your gross monthly income.

 

GENERAL FRONT END RATIO


Depending on your loan type that you go with, will tell you what your DTI ratios can be to get your loan approved. There are two numbers here, general front end (shown below in BLUE) and general back end, (shown below in GREEN).


FHA general 31% / 43% max 40% / 50%

USDA general 29% / 41% max 34% / 46%

Conventional general 28% / 36% max 28% / 50%


Lets first focus on the front end (the BLUE), being we now know that your monthly gross income is $3,120 – The front-end ratio tells you how much monthly house payment you can qualify for monthly.


The monthly payment will include your principal payment, interest on the loan, taxes and insurance. also known as P.I.T.I.


For example, for an FHA loan you would calculate your income of 3120 x 31% = $967.20. This means, $967.20 would be the total PITI monthly payment you would need to stay in to be approved.


USDA would be $3120 x 29% = $904.80, and conventional would be $3120 x 28% = $873.60.


Lets say you want to keep your total PITI at $950 a month, you would qualify to go with FHA as your under the 31% front end ratio in this example.


AWESOME! You just learned how to figure out your front in debt to income ratio and what you can afford for a total PITI monthly payment!

 

MAX FRONT END RATIO


FHA general 31% / 43% max 40% / 50%

USDA general 29% / 41% max 34% / 46%

Conventional general 28% / 36% max 28% / 50%


Now, lets say the home you love pushes you over the general front end limits. Look at the second column, (the PINK) this shows the MAX front-end ratios. This is the absolute MAX amount lenders will consider in your ratios when qualifying your loan.


The difference in general to max is, with max, you may need to have a little stronger credit score or show that you have a little more funds available in the bank. With general, your approval will be much less risky for your lender and your approval odds may be a lot better. Ask your lender for additional details on if you qualify for the max ratio limits.


For now, lets say you can qualify using the max limits. Looking at the PINK front-end ratios for FHA would be your income of 3120 x 40% = $1,248 you could spend monthly for your total PITI. USDA would be 3120 x 34% = 1,060.80, and conventional would be 3120 x 28% 873.60.


Before we move on to the back end ratios, you need to figure out your monthly debt.

 

YOUR DEBT

Debt is any payment that you pay on a monthly basis such as car payment, student loans or other loans, credit cards, etc. The exception to this when determining your debt for your DTI, would be utilities, cell phone, food – basically if it is reporting on your credit report, you need to count that as monthly debt.


With bad debt or collections on your credit report, even if you don’t plan to pay them, they also need to be included. Lets say 4 years ago there was a credit card you never paid and that credit card balance that was never paid has an unpaid balance of $2,500. You will need to calculate 5% of this total as debt. YES, even though your not making a payment on it and don’t plan to pay for it, the lender will still “pretend” this is a monthly payment you have. So for example, $2,500 credit card balance at 5% is $125 month. (Total Debt x 5% = Monthly Debt Total). Lets add this in your debt for this example.


Now, when figuring out your credit card debt – if you have a credit card balance of $1,000 – the entire $1,000 is not debt, only that minimum payment is. So lets say you have one credit card with a balance of $1,000 but a minimum payment of $45, another credit card with a $500 balance and a $30 minimum payment, and you have a car payment of $220.


This is how your total debt would be calculated:

  • Old Collection Debt $125

  • Credit card 1 $45

  • Credit Card 2 $30

  • Car payment $220

  • New projected PITI mortgage payment $950

This means you have a total of $1,370 in monthly debt.

 

GENERAL BACK END RATIO


FHA general 31% / 43% max 40% / 50%

USDA general 29% / 41% max 34% / 46%

Conventional general 28% / 36% max 28% / 50%


Okay, now we know your monthly gross income is $3,120 and your total expected monthly debt with a new home loan is $1,370.


Focusing on the back end ratio (in GREEN), lets look at what you qualify for on the back end ratio with FHA at 43%.


You would take your total monthly income of $3,120 x 43% = $1,341.60. This means the back end ratio to qualify for your total debt is $1,341.60 but we just calculated your new debt to be $1,370, so your debt is more than what the qualified ratio is by $28.40 per month. What can you do?


In this case, the first and most likely the easiest would be to pay off one of the credit cards and get rid of one of the minimum payments to bring your debt down by $30 so you can qualify in the general back end ratio. Your lender in most cases, can accept a debt pay off letter from your credit card company and now remove this monthly payment from your debt.


Another option would be to see if you can pay down some interest on your home loan to bring the PITI down by $30 per month.

 

MAX BACK END RATIO


FHA general 31% / 43% max 40% / 50%

USDA general 29% / 41% max 34% / 46%

Conventional general 28% / 36% max 28% / 50%


If you are way off from the 43% for the back end ratio when adding your monthly debt, another option would be that you see if you can qualify to go in the max back end ratios (in RED) limit by talking with your lender.


You did it! You now know how to figure out your Debt to Income when shopping for a home.

 
I hope you found value in learning about your debt to income limits. Even though your lender can tell you what your approved for sometimes having the advantage of playing with your own figures can help you understand the back end of the process and where your approval home loan figures come from. Please use the PDF worksheet as a guide to help you determine your own DTI figures. If you’re looking to buy or sell a home in the North Georgia area, please reach out to me. My goal is to help you achieve all of your goals in life & in real estate. Be sure to check out my other blogs and resources to help you, or please share this content with someone if you think it could help them. Until the next one, stay blessed!
 

Melissa English is a Real Estate Agent and Investor in the North Georgia market with hundreds of closed transactions and nearly a decade of experience in real estate. She is also the founder of GeorgiaKey.com - a real estate investing company that specializes in purchasing property offering quick closings in as-is condition.

 

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